April 2012 | Outsourcing Blog | BPO Industry Updates and Articles

IT outsourcing services used to be paid for like these were normal items in a shop. So if a company needed server management services, application development, or even network monitoring, they would look for a provider, get the job done, and pay for the materials used and services rendered at a definite price.

Customers in this day and age expect more value from their IT operations, which then pushes IT service providers to reformulate pricing models to tap the rapidly growing market for high end sales.

A partner at K&L Gates, Shawn Helms, said vendors now construct pricing models based on what the clients are typically looking for and are looking for ways that can maximize earnings. Furthermore, Steve Martin, partner at outsourcing consultancy firm Pace Harmon, said the new pricing models aim to cater to companies which have detailed/segmented IT processes or are having a hard time transitioning from traditional ones.

Advantages and drawbacks of various IT outsourcing pricing models

In an article written by Stephanie Overby and published at CIO.com, various IT outsourcing pricing models were discussed along with their advantages and drawbacks. These are the new pricing models for IT outsourcing:

Gain-Sharing Pricing ModelThis pricing model focuses mainly on the volume or quality of output. This is typically used by vendors for clients who don’t mind paying more for maximum output or quality. This model works best for buyers who’d want immediate results and a strong partnership with vendors.

Ross Tisnovsky, Senior Vice-president at outsourcing consultancy firm Everest, believes aggressive collaborative effort from both parties is crucial since they both aim to maximize the expertise of the supplier to come up with the best and most number of outputs. Also, for this model, the budget for the suppliers is usually not restricted.

A huge drawback for this pricing model is initial cash out needed to start the operation. It would also mean that both parties should be transparent to create a relationship that can share risks and rewards. This is hard to do because according to Martin of Pace and Harmon, it is common that neither of the parties involved want to fund the initial budget, unless there is assurance that they will be able to see return on investments.

Incentive-based Pricing ModelThis model allows vendors to receive incentives if they were able to over deliver. This is usually an add-on to basic pricing models. It is used by customers as motivation to push vendors to deliver more. If all goes well, both parties win.

It is advised that this type of pricing model be used by buyers who have ample experience in dealing with IT vendors, so that it would be easier for them to quantify or measure the performance and output of the operation.

Consumption-based Pricing ModelIn a nutshell, this pricing model means pay as you go through the process or pay-per-use. It works best for companies that have varying needs or those who only need service for a specific segment. The most popular platform that uses this pricing model is the cloud.

Transactions are also easier since instead of having one huge bill or an initial investment, it becomes an operating expense. Likewise, it would mean that determining the annual cost is harder since there will be months when you are not using the service and vice versa.

Shared Risk-Reward Pricing ModelThis model requires the buyer and the team to synergize for a specific period of the contract. Go big as they say, which means buyers put everything at stake, like a captain aboard a ship portrayed by the vendor. If the ship sinks, the captain will be the last to jump.

According to Gartner, the model somewhat alleviates risks since it is evenly distributed and both parties will be accountable for the outcome. Since there will be a lot of sharing, results will be hard to measure and varying opinions will definitely take its toll on the entire operation.

Creating Solid Outsourcing Relationships

As industries become more diverse and platforms in achieving goals are evolving, it is safe to say that more and more clients have raised their standards when looking for the right outsourcing partner. During the first few years of outsourcing and to combat the effects of recession, buyers were initially inclined to go for the more affordable business solution, but that’s no longer the case.

Quality of output and long-term solutions are what high-end buyers are looking for nowadays, and some of the factors that affect their decision-making process are the actual costs of the entire operation against supplies used, sustainability of the operation, and specific expertise of labor pool. This becomes a window of opportunity for the IT sector as the market has grown and new services are added.

So how should clients deal with their service providers, now that the outsourcing industry is evolving? An article posted by iGATE Patni Senior Vice-president David Kruzner at ITWorld.com enumerates things to consider to have a successful outsourcing relationship with vendors:

Look for the vendor that will give you the most value for your money. When finding a business solution, avoid looking for an easy way out. Make a hypothetical scenario in your head on how the solution will help your company grow and how it will culminate itself as a valuable arm to the company. Also, since you probably have assessed what the operation will require, there’s no need for you to ask the incoming outsourcing partner to redefine what is lacking in the operation.

Clients should be able to spot the right vendor based on the previous work they have done and what the vendor can contribute to the company as a partner.

Consider vendors as team members.To create synergy in the operation, clients should treat the service provider as an integral part of the team. This would mean that the vendor will carry out the values and goals of the client. They should also incorporate the outsourcing process as a long-term business solution rather than a quick fix to internal problems. Also, integrating the IT department and outsourced party is a great way to maximize the expertise of the latter because they are given the chance to look into other opportunities.

Proper alignment and definition of tasks for service providers With the economy that businesses are facing today, stricter management practices and metrics should be applied for IT outsourcing partnerships. Having a specific goal and working around it was one of the factors that “gainsharing” in the 1990s lacked, which was why most of the partnerships back then failed.

True partnerships work together by eliminating risks one by one, and achieving goals as they progress. Cost-cutting and labor arbitrage are a thing of the past, as new clients strive to achieve long-term goals and grow with their outsourcing partners.

Cloud computing is definitely one of the fastest growing processes being adapted by numerous companies all over the world. Any mismanagement of the cloud can be detrimental to a business’ image, budget, and sales prospects. Regular system maintenance and constant updates are crucial so that the cloud solution remains relevant. But how can a business do all of those when the cloud is extremely far-reaching and is constantly changing?

Gartner Fellow and Vice-president David Cearley explains that cloud computing has in fact broken through several businesses in various industries. It is an IT platform that enables companies to monitor, control, and implement business processes, mostly via the Internet. This would mean a flexible IT operational environment with less dependence on traditional software and hardware licensing models.

Cloud computing trends

In an article posted at Gartner.com, experts at the renowned IT research company said businesses and individuals should think ahead and look at the trends when it comes to creating cloud strategies.

Careful examination of cloud benefits and challengesBuyers tend to become overwhelmed by the slew of benefits that the cloud has to offer, some of which are more flexible environment, reduced operational costs, and simpler processes. It also enables business owners to shift focus to other high-end IT processes, as well as make way for business improvements. But with several challenges that buyers will inevitably deal with, they should expect longer waiting time for contracts to be final, because they now have to really consider the possible obstacles such as data security, quality, lock-in clauses, etc.

Fusion of internal applications and cloud servicesSince there are several types of cloud services (public and private) and companies have varying requirements, it will not be long before applications and services are mixed and matched by buyers. Gartner says it is more ideal to look for short-term solutions, integrating application and data, and creating a hybrid setup where internal applications are linked to external ones.

Cloud Service BrokerageSince buyers don’t usually know where to find the best deals for cloud services, having cloud services brokerage (CSB) will make things easier for vendors and clients. Gartner says CSB will be more popular in the next few years as more and more businesses consider the cloud solution.

Creating an allowance for the adoption of cloud computingExpect the cloud to proliferate more. If you are a business owner, would you like to be left behind? Of course not! A lot of businesses will eventually discover the benefits of the cloud approach. However, it is essential to note that there are certain factors to take into account when it comes to developing cloud-centric applications. Consider not only the benefits but also the scope and limitations of this business solution.

Cloud computing on data centers for flexibilityCloud computing involves the enterprise as the buyer and the cloud services vendor managing the data center and operational models. As the enterprise establishes its own data center, there will come a time when it will be influenced by the implementation models of the service provider. Enterprises are advised to make use of cloud concepts to future data centers for flexibility and operational efficiency.

Non-native English-speaking Countries take the Global English Test

The English language has always been the universal language, and since procuring services and supplies from offshore locations has become very popular amongst IT companies, executives are still apprehensive when it comes to making transactions with vendors abroad. The main hurdle, they say, is finding an offshore outsourcing hub with employees who not only understand and respond to basic conversations, but can also comprehend and give their insights to business presentations and discussions.

Stephanie Overby of CIO US shared an article at PCAdvisor.co.uk, analyzing the results of a test done by GlobalEnglish, an online provider of English language instructions to renowned companies like Cisco, Procter & Gamble, and GM.

More than 200 companies from 76 non-native English-speaking countries participated in GlobalEnglish’s test. This aims to determine how well the participants know the language, how they use it via different platforms (written or spoken), how it is being used in varying situations - from brainstorming with the team to sales pitches with potential clients, etc.

The rating system is from one to ten, with one covering basic English skills, and 10 representing more complex tasks. The test results show that the average score of the participants is 4.15, a seven percent decline from the 4.46 grade posted in the previous year. This would then mean that for every 10 workers, four would not be able to communicate and grasp basic ideas during face-to-face discussions.

Meanwhile, 60.5 attained a score between 4.0 and 7.0, which is still acceptable and is only a few points below the intermediate level. This means that a large number of participants are not able to take on crucial roles during business meetings or handle presentations.

According to Alex Lowrie, Senior Director of strategic account management at GlobalEnglish, it is possible for the 2012 score to be lower than the previous year because companies that are venturing into the global market have premature strategies when it comes to leveraging the English language in business deals.

Based on the size of labor pool, the Philippines is the frontrunner when it comes to fluency in business English with a score of 7.11. This would mean that Filipino workers can participate in business meetings, comprehend complex matters, and provide inputs. India ranked second with 5.57, followed by Canada (5.45), Indonesia (5.28), and the United Kingdom (5.24). On the other hand, Colombia (2.75), Brazil (2.95), Turkey (2.97), Japan (3.40), and Mexico (3.50) did not perform well in the test.

Multisourcing is now widely accepted by a lot of organizations for faster and less expensive internal and external operations. It means that two or more providers are engaged to do several segments of a process. More often than not, unavoidable challenges arise and sometimes, project managers wish they have at least come up with a good service management plan before utilizing the multisourced operating model.

Another factor that adds pressure is the cloud adoption. Basic management skills are a thing of the past since the usage of the cloud entails a more complex environment for the entire business. It can put sensitive data at risk and expose the company’s trade secrets. Having the cloud in an operation would also mean all the service providers should comply with the standards of the industry. This is another factor that should be addressed immediately because if one of the suppliers isn’t competent enough industry-wise, it would cause delay and businesses will lose money.

What would make a multisourced operation work properly is the creation of a service integration and management (SIAM) function. It is a management system that dictates which functions should be assigned to each provider. It will also make sure that the providers are doing their part.

Tips for an effective service integration and management function

The Director and Chief Research Officer at Momentum, Hannah Patterson, shares an article at Info.tpi.net that covers five tips which can help create an effective SIAM function.

1. Map it out. Make sure everyone involved knows the role of the SIAM function and how it will be implemented across all business aspects. Identify the scope of the function. This may include not only IT but also facilities and other services.

2. Have a sense of ownership. If you represent a group of service providers or you brand yourself as the hub of several outsourced services, you will be held accountable if one of the service providers under you fails to meet the standards of the client.

3. Don’t let the SIAM fall into pieces. In large operations, some of the service providers tend to break apart from the entire operation if they are not happy with the setup or if they feel they do not play an important role. It is up to you, the main hub, to keep the synchronization among service providers.

4. Provide clear contracts. The clauses in your contract should be echoed within the SIAM function so that it would be easier to identify goals and make sure that all parties involved are always on the same page.

5. Be independent. Providers work together to meet the goals, but bear in mind that the integrator of the process serves as the client’s agent that delivers services independently from providers responsible for infrastructure, for instance.